Letter From The President Of The New York County Lawyers' Association

2009-11-02 00:00

To The Readers Of The Metropolitan Corporate Counsel:

Good Intentions, Unintended Consequences

On September 1, 2009, extensive amendments to Title 15 of Article 5 of the General Obligations Law1went into effect, dramatically changing New York's statutory short-form power of attorney, and also imposing new requirements on all powers of attorney - both statutory and nonstatutory - executed by individuals2in New York State.The amendments were proposed by the New York State Law Revision Commission,3which expressed concern that New York's statute was silent on a number of questions surrounding powers of attorney, most notably questions concerning the authority of the attorney-in-fact to make gifts of the principal's property.

These concerns were brought to the fore by In the Matter of the Estate of Ferrara, 7 N.Y. 3rd 244 (2006), a case in which an incapacitated principal executed a power of attorney - prepared at the instructions of the principal's nephew - that authorized the nephew to make unlimited gifts to himself.The principal's will left his entire estate to the Salvation Army.By the time the principal died, however, his nephew had transferred substantially all of the principal's assets to himself.The Salvation Army, represented by NYCLA's Past President Edwin David Robertson, sued.The Court of Appeals held that the power to make gifts under the power of attorney did not encompass such unlimited gifts, since they were not in the best interests of the principal.

Ferrara is, unfortunately, one of many cases of power of attorney abuse involving exploitation of incapacitated, frequently elderly, persons. Googling "power of attorney abuse" produces 137,000 hits.This is a real problem, and the Law Revision Commission was right to be concerned about it.

The cure, however, is sometimes worse than the disease, and the new New York statute has produced some unintended and very unfortunate consequences.

First, the statute provides, "Unless the principal expressly provides otherwise, the execution of a power of attorney revokes any and all prior powers of attorney executed by the principal."4 "Power of attorney" is broadly defined as "a written document by which a principal with capacity designates an agent to act on his or her behalf."5 Thus, if a principal executes a statutory short-form general power of attorney, giving broad powers to handle financial matters on her behalf to the principal's spouse, and later executes a bank's standard form of power of attorney authorizing her daughter to execute transactions involving a single account, the later, limited power of attorney given to the daughter would revoke the general power of attorney given to the spouse.Similarly, if a principal signs a limited partnership agreement that grants a limited power of attorney to the general partner to amend the partnership agreement for specified purposes, a later-executed general power of attorney will revoke the general partner's limited power of attorney.

The automatic-revocation presumption would be reversed if the technical corrections bill that has been proposed6passes.Until then, attorneys would be well advised to consider whether they should include special provisions in any power of attorney that they prepare to (a) nullify the automatic-revocation presumption and (b) protect their power of attorney from being automatically revoked by a later-executed power of attorney.

A second practical problem concerns residential real estate closings.In the past, principals frequently executed a power of attorney to allow their lawyer to sign the numerous, pre-agreed closing documents on their behalf.This practice has been significantly complicated by the new statute.Section 5-1514 is entitled "Major gifts and other transfers . . . ." and subdivision 3(c)(9) speaks of giving the agent the power to "create, change or terminate other property interests . . . ."Title companies have expressed concern that this language is sufficiently broad that a power of attorney to convey title to real estate must comply with Section 5-1514 and, if it is a statutory short-form power of attorney,include a statutory major gifts rider.Undoubtedly title insurers and the real estate bar will find a way to cope with the new statute, but equally undoubtedly at an additional cost to clients.

Trust and estate lawyers have commented that executing a statutory short-form power of attorney requires significantly more time than the old form.Firms that have a package price for basic estate planning documents are considering whether they need to increase that price to reflect the increased burdens associated with the new statutory short form.Practitioners have also identified a large number of areas in which the new statute has created uncertainties, problems, or both.

While law-abiding clients and their lawyers are spending more time dealing with the new provisions, we all suspect that unscrupulous agents will not be deterred in the least by the new statute.After all, Ferrara was hardly breaking new ground when it reminded us that attorneys-in-fact are a special class of common-law agents, and are subject to the same principles of undivided fiduciary loyalty that have been recognized for centuries.

The Law Revision Commission was correct in identifying a number of deficiencies in New York's old General Obligations Law, but it would be well advised to revisit the subject, based on practitioners' experiences in living with the new General Obligations Law, in order to redress some of the unintended consequences of the new law.

2 The new statutory provisions do not affect powers of attorney executed on behalf of corporations and other entities, and they may not affect powers of attorney executed by people who are acting in a fiduciary capacity, such as corporate officers and trustees.